Executive Pay: Ackermann, Winterkorn and the Jealousy Factor

Günter Ogger on the capping of executive compensation

It was nice to hear that Bernd Osterloh wants to cap the pay of his bosses at VW. But is the Chairman of the Works Council really the right person for this? Members of the works council acting as moral apostles, in particular at VW, has been tried before — and it came to nothing.

Apart from that, who or what previously stopped Osterloh, a member of the VW Supervisory Board, from voting against the remuneration plans of VW executive managers?

German corporations (including the 30 DAX corporations and VW) are subject to employee co-determination rules, whereby half the supervisory board is made up of employee representatives and trade unionists. And yet, so far, these employee representatives have willingly approved the same controversial millionaire salaries for bosses that they also publicly criticize — especially ahead of annual wage negotiations.

Why? Perhaps because they enjoy similar controversial privileges: an excused abscence from work, generous expenses, free use of corporate jets and company cars, own offices with researchers and secretarial staff, as well as bonuses and supervisory board attendance fees. Another possible explanation is they cannot understand the complicated remuneration systems of top managers. If so, they are not fit to carry out their mandate, and should step down from the supervisory board.

That the debate on executive pay in Germany should revolve around Martin Winterkorn, Osterloh’s top boss, is no coincidence. The 18.3 million euros that VW boss Winterkorn pocketed in 2011 engendered feelings of 'jealousy' in politicians, reporters, journalists, trade unionists and other 'low-earners' so much that the capping of executive pay began to be seriously considered. And yet, Winterkorn is nowhere near the record holder among Germany executives: the man driving Porsche, Wendelin Wiedeking, has pocketed around 70 million euros in just one year, thanks to a previously agreed (but initially smaller) profit-related bonus. Compared to Wiedeking and his peers, Martin Winterkorn has been underpaid. In fact, he did his job so well (assuming it was all his doing) that VW group in 2011, despite paying the world’s highest hourly pay rates for skilled workers, still made a record net profit of over 15 billion euros, and became nearly the biggest car maker in the world.

That year many benefited from this excellent management performance of the VW managing board: the workforce (a special bonus of 7,500 euros each on top of already lavish wages), the shareholders (as the share price rose), the customers (buying products with excellent price-performance ratios), and the German state (substantial taxes paid by VW headquarters, Wolfsburg).

The overall result achieved by the ex-head of Deutsche Bank, Josef Ackermann, is a sad story. Of the billions of euros earned by Germany’s leading bank over the past 10 years, hardly any trickled down to customers, shareholders or the German state. Most was grabbed by the bonus bankers in London and New York. The share price, once near to 100 euros, soon dived and drifted around 30 euros. However Ackermann, unlike Martin Blessing who was head of Commerzbank, could at least claim he did not need to ask the government for a bailout. Nevertheless, it was ill- advised of him to give a victory sign in court to press photographers after being found innocent of a breach of trust. Ackermann, the man that the German Left Party loved to hate, was no victor, and he certainly did not deserve the 8 million euros payout authorized by his Supervisory Board in 2011. After all, Deutsche Bank had ventured into too many risky deals, was too undercapitalized, had insufficient financial reserves, and was involved in multi-billion euro court cases.

That is the trouble with the remuneration of executives: a 'greedy glutton'‘ could be actually rather cheap measured against his actual performance, while a 'master of the universe' is often not worth his wages. German corporate executives have only themselves to blame if their pay has become a political issue and the German government considered placing a legal cap on executive pay. While they have been decimating workforces and, since 1990, have refused to give the remaining employees a real increase in take-home pay (after tax and social insurance contributions), they themselves have been looting the cashbox. During the same period, the nominal pay of managing board members of DAX 30 corporations has risen on average by 10 percent annually.

In fact, their actual earnings were much higher: the published figure is only the amount paid out, and does not include perks like luxurious company villas with lifetime occupation rights, costly insurance premiums and huge pension pots. In recent years, board members have been grabbing whatever they can get their hands on. When Daimler boss Dieter Zetsche leaves the firm, he will be entitled to pension payments of over 20 million euros, without having paid in a single cent himself. Why should bosses not also save part of their income for retirement, just like all other employees?

The lavish comprehensive remuneration of CEOs in Germany leaves them better placed than even the German chancellor, president or ministers. Although CEOs are not personally liable for the outcome of their actions, they still claim rewards that otherwise only accrue to popular film and sports stars. After all, a CEO is only a manager — a salaried employee — not a risk-taking entrepreneur.

Yet, while sports starts have to prove their worth each week, CEOs have ways and means of cleverly enhancing their performance figures. If a formula one racing driver performs badly, half of the sports world sees it immediately. But if ThyssenKrupp CEO, Ekkehard Schulz, makes wrong decisions (for example, builds a steel plant in Brazil) the negative consequences only become apparent years later. This leaves enough time for a clever CEO to plan an 'honorable' and well-paid exit, to the next top job.

CEOs cannot be compared with film or sport stars who have unique talents. Those stars are worth their money – because audiences pay it to see them. Managers are not unique and can easily be replaced. So why are executives paid so much? That is the question that the owners of public corporations are called upon to answer.

In the case of family-owned companies, the answer is simple: the pay of top employees is decided by the majority owners. If, for example, Friede Springer, the owner of the Springer publishing house thinks that CEO Mathias Döpfner is worth 10 million euros annually, she will approve it, without a politician in Berlin having any say in the matter. It is, by the way, a characteristic of DAX 30 corporations controlled by single families or family trusts, such as BMW, Henkel and Fresenius, that the wages of their managing board members do exhibit a sense of proportion.

But the situation is different at public corporations that do not have an anchor shareholder. There members of the managing board can personally select supervisory board members to suit themselves, and here is the source of the problem. Almost inevitably, they will recruit supervisors who are like themselves. They are part of an informal network, a kind of private club, which works to their mutual advantage, but to the disadvantage of everyone else.

Much has been written about the weak supervision of major corporations, but so far little has been done about it. Supervision is still superficial and supervisory board members avoid conflict with managing board members over excessive pay, since it was these same executives who got them appointed in the first place. There was once a code of honor among executive managers, an unspoken agreement on what was acceptable behavior and what was not; today that code of ethics has been swept away by an alternative ideology.

It was a new-style of CEO, Jürgen E. Schrempp, who helped to sweep away decent behavior in the boardroom. He was once considered the greatest-ever manager in Germany and was iconical: today he is considered the worst-ever destroyer of capital. Schrempp, when boss of Daimler, used an attempted fusion with US-rival Chrysler to leverage his personal income from a South German CEO average to a typical U.S. CEO multi-millionaire level. In spite of this, he saw no reason to sacrifice the economic security afforded by the German-style social market economy. Schrempp‘s example was soon followed by other Germany executives. And while supervisory boards looked the other way, these managerists enjoyed the best of both worlds: German-style financial security as well as US-style world-class CEO salaries. At first glance, their pay was variable and conditional upon meeting certain corporate targets; in reality these corporate leaders, assisted by clever advisers, were designing their own pay packages, so that they would always win the jackpot, even if their firms reported a loss.

A counter-argument is that as long as a corporation is doing well, the pay of top managers is a secondary issue. But this is wrong. Whether VW CEO Martin Winterkorn pockets a one-thousandth part or a ten-thousandth part of the annual profit is of much more than marginal importance, because his high-visibility salary also sets a precedent. Aross companies the pay of all managers is ultimately related to the pay of top executives. If executive board pay rises, the firm can anticipate corresponding expectations and demands from lower management levels. Excessive pay at the top will eat its way down the hierarchy even as far as operatives on the production line, and will then give trade unions the ammunition to demand bigger pay rises for everyone.

Hardly less signficant is the external effect: highly paid television moderators are grateful for such excesses, they help to boost viewing figures if you can pitch the rich against the poor. Occupy will block bank entrances, and newspaper columns will announce the impending doom of the capitalist system, and in parliament left-wing parties will have another economic injustice to expose.

If only to prevent such unnecessary social conflict, managing board pay should be capped. Lawmakers should take action, because managers of this type cannot be expected to voluntarily limit their own income. Voluntary capping would be as ineffective as corporate governance is. Pay regulation should, however, be restricted to publicly traded corporations, where free floating shares are over 50 percent. Neither should the parameters on which executive earnings are based be open to manipulation by managing board members, for obvious reasons.

A point of reference could be the salary of a country’s head of government, for example, in Germany the Federal Chancellor. It could then be openly discussed whether a CEO salary of five-times or perhaps ten-times that amount would be reasonable remuneration for the work that CEOs do.

Whichever CEO thinks their salary level is too low, could always apply for a job in the USA, where top executives pocket extraordinary amounts. At the time of writing, nobody apart from Klaus Kleinfeld, the former Siemens CEO, has pulled this off. It would be not a bad idea to ensure that top executives, who believe they should participate in a business’s success, should also share in its failures: for example, a malus for years with losses, and salary cuts in years when the share price falls.

There is no need to worry that the quality of corporate management will suffer, just because salaries are capped. It is well known that really good managers do not work just for money, but to win the game, which they play so well. We may also recall the words of Hans L. Merkle, the former godfather of Bosch who famously said, "600,000 German marks per annum is enough for anyone to live on — nobody needs any more than that. "

« back